Ramit Sethi Says Over Half the Entrepreneurs He Knows Make This Grave Investing Mistake

Invest in your business, but don't make it your only investment.

Building a successful business takes a lot of time, energy, and at a certain point, money. Although you can certainly start a business with little or no money, it's far more likely to grow if you're able to invest in it.

It makes perfect sense to invest in your business, but unfortunately, some entrepreneurs take this to an extreme. They don't invest in the stock market because they believe they could make more by putting that money in their own businesses.

In fact, financial advisor (and entrepreneur himself) Ramit Sethi recently shared that over half of the successful entrepreneurs he knows don't regularly invest in the stock market. He says that "for most, this is a grave mistake." Sethi's correct here. While it might seem logical to invest in your own ventures, you're taking a big risk if you overdo it.

Why entrepreneurs should invest in the stock market

Stock market investing has proven to be one of safest and most effective ways to build long-term wealth. Although the market has its good years and its rough patches, when you look at it over long periods of time, it's extremely resilient. The average stock market return has been about 10% per year over the last 50 years.

That makes it pretty clear why a regular person should invest in stocks. Your money will grow much more this way than it would in a bank account, because of higher returns and compound interest (earning interest on top of the interest you've already earned). Over time, that adds up and helps you build a much larger nest egg for retirement.

The key difference between the average investor and entrepreneurs is that entrepreneurs have their own businesses to invest in. Instead of putting $500 into the stock market, they could put $500 into a business expense, like inventory, and potentially make a much greater return.

However, that doesn't mean you should ignore stock market investing as an entrepreneur. If you do, you're putting all your eggs in one basket, which is a common investing mistake. Most reputable sources of investing advice recommend building a diversified portfolio. If your own company is your only investment, and it fails, you need to start over from zero.

As a business owner, you'll be naturally biased about its odds of success. Hopefully, your business succeeds. But it's important to take a realistic, big picture view. Fortunately, there's hard data available on this. Here's info on the portion of businesses that fail according to the Bureau of Labor Statistics:

• 20% of businesses fail during the first two years
• 45% fail during the first six years
• 65% fail during the first 10 years

Look at it like this -- would you invest all your money in a new, unproven business? This is a very high-risk strategy, whether you're investing in someone else's business or your own.

How to balance entrepreneurship and investing

There's nothing wrong with investing, and even investing heavily, in your business ventures. Most successful entrepreneurs start out bootstrapping and using their own money. Just don't commit so much money to your business that you neglect other important parts of your financial health.

Put a portion of every paycheck in an investment portfolio so you're building a nest egg for retirement. You can do this through a 401(k), if you have one available through an employer, or through any of the top online stock brokers. Most of those brokers give you the option of opening an individual brokerage account, an individual retirement account (IRA), or both.

Because you're already investing money in your business, which is a high-risk venture, be more conservative with your other investments. A couple of good options are:

• Target-date funds that are optimized for a specific retirement year
• Index funds that invest in a large number of stocks and charge low fees

The amount you invest is up to you. You could put 10% of your income towards your retirement, and 10% or 20% toward your business. Consistency is what's important so that investing for retirement becomes a habit.

Entrepreneurship doesn't need to be an all-or-nothing commitment. You can, and should, balance putting money into your business and investing money safely for retirement.